Weekly Economic Digest: More Confidence, Less Income

I’m a numbers guy, so I get a real kick out of reviewing the latest economic data and identifying which pockets of the economy are heating up and which are slowing down.

However, with breaking economic news coming out nearly every day, I understand that it can be a hassle keeping up with each and every report. So on Fridays I like to recap the past week’s highlights and provide my take on the latest economic trends. Let’s take a look at this week’s big headlines:

Consumer Confidence

In February, the Conference Board’s index advanced to 69.6. This is up nearly 20% from January, when we saw a reading of 58.4. February’s results also surpassed the 62.5 consensus estimate. This month, the biggest change was that consumers became more confident about their future expectations — this sub-index rose from 59.9 last month to 73.8. Meanwhile, the current conditions index climbed from 56.2 to 63.3.

In addition, the final reading of the University of Michigan Consumer Sentiment Index came in at 77.6 in February from 73.8 at the end of the previous month. Economists had projected 76.3 for the February gauge.

In January, consumers were skittish because they were experiencing sticker shock from the latest payroll tax increase. Now that this is old news, they’re starting to settle down — and this bodes well for consumer spending.

U.S. GDP

In the fourth quarter, the U.S. economy grew at a revised 0.1% — up from the earlier estimate of a 0.1% contraction in GDP. The main growth drivers were consumer spending, business investment as well as a decline in imports. Meanwhile, federal spending cuts and decelerating exports were a drag on the economy.

The latest revision means that the U.S. has squeaked by without a quarterly contraction since the recession. This is a small victory, but obviously we would all like to see more growth across the board.

Personal Income

In January, personal income decreased $505.5 billion, or 3.6%, reflecting the expiration of the “payroll tax holiday.” Disposable personal income also decreased $491.4 billion, or 4%, in contrast to an increase of 2.7% in December.

This was the biggest drop in personal income in 20 years, but the silver lining for retail stocks was that personal consumption indicators increased slightly — about 0.2% — in January. Also, the fact that many companies essentially “pre-paid” their usual bonuses or dividends in December means that this decrease largely reflects special factors that won’t be repeated going into next month. So I’m not too worried about this likely temporary dip.

The Jobs Market

Last week, jobless claims plunged 22,000 to an annual rate of 344,000. This was better than economists’ expectations of 365,000. Similarly, the four-week moving average fell 6,750 to 355,000.

Jobless claims continue to be a positive sign for the jobs recovery, but we still have plenty of room for improvement. Fed Chairman Ben Bernanke mentioned this week that it would take years for the jobless rate to reach normal levels.

The Housing Market

In January, new single-family home sales surged nearly 16% to an annual rate of 437,000. This is the highest pace since mid-2008. January new home sales also came well above economists’ estimates, which called for 375,000. Meanwhile, December new home sales were revised up from 369,000 to 378,000.

The headline results certainly got the market going on Tuesday, and there were some interesting details in this report. For one, the inventory of new homes declined to from 4.8 months to 4.1 months—the lowest level in eight years. At the same time, new home prices fell more than 9% to $226,400. So while new home sales are ramping up, homebuyers are opting for less expensive models.

With that said, we did see a bigger-than-expected dip in U.S. construction spending last month according to the Census Bureau. Construction spending fell to a seasonally adjusted -2.1%, from 1.1% in the preceding month. This was sharply lower than analyst expectations, who only forecast a 0.4% decrease.

But while this was the largest drop in construction spending in 18 months, it was largely a temporary setback for the housing market due to the back-and-forth in Washington D.C. and a freeze on government spending, and I see plenty of upside ahead for housing stocks.